Who’s afraid of a falling yuan?
Now it’s the turn of the Chinese yuan. An important economic development of late has been the depreciation of Asian currencies relative to the dollar. China’s currency is in the spotlight again amid new speculation over whether Beijing is implementing a competitive devaluation of some sort, or will do so—and whether this will become the excuse for a trade war.
The short answer to the first question appears to be no. The yuan has lost considerable value versus the dollar in onshore trading—the domestic market where Beijing manages the exchange-rate within a band. It fell to a seven-month low of 7.27 yuan to the dollar Wednesday, and has declined in value for five months straight.
This runs in parallel with a depreciation in yuan traded offshore, where Beijing exercises less control and where the exchange rate fell to about 7.30 Wednesday. Beijing is tolerating a slight depreciation as it allows the administered midpoint for the onshore yuan to drift weaker. Yet it’s hard to argue this is a deliberate strategy to gain a competitive edge in export markets, as American trade warriors often argue.
The onshore exchange rate keeps hitting the lower limit of the trading range Beijing sets, and Beijing keeps resisting calls for a deeper devaluation. President Xi Jinping and the Communist Party leadership probably would prefer a stronger yuan. This would bolster their efforts to expand use of the yuan as a global trading currency.
Mr. Xi in January emphasized a “strong currency" as a cornerstone of his plan to develop China’s financial markets. Worse for the Party, a weak yuan exposes Mr.
Xi’s bad economic management. A driver of recent depreciation is the divergence in economic sentiment between the U.S. (still reasonably
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